2015 Trends From A Momentum Investor’s Perspective

Although major equity market returns around the globe were flat last year – the MSCI World Index only recorded a positive return to sterling investors due to the strength of the U.S. dollar – there were pockets of momentum-based return that could be extracted during the year, but only if you were prepared to be nimble in your asset allocation and follow the trends as they emerged.

Fortunately, using ETFs allows us to do this. Multi-asset investors, such as ourselves, who use only trends and momentum as the criteria for selecting assets, shifted our asset allocation from a global equity bias at the start of 2014 to one dominated by U.S. equities and gilts at the year-end.

The chart below shows us why:

However, as can be seen in the monthly asset allocation chart below, there were less notable areas where positive trends emerged mid-year, such as property real estate investment trusts (REITs) and Asian equities:

(Based on the Thesis iFunds Spectrum Orange Fund)

Out of favour

In terms of deteriorating trends, Europe clearly fell out of favour as concerns over deflation gathered pace – also evidenced by the introduction of short commodities in our allocation in October – coupled with a weakening currency.

U.S. equities were the only growth story in town last year, combined with "dull" UK gilts.

Short gilt investors lost out

Medium dated UK gilts started the year at yields of around 2 percent, which led many investors to think that they were at fair value, at the very least, if not due for a correction, and positioned themselves in short-dated bonds.

However, fears over deflation led yields to fall towards 1.5 percent and represented one of the best investments available on a risk/reward basis throughout 2014.

U.S. based equities and UK fixed interest dominated the top of our returns table last year, based on our Thesis iFunds Spectrum Orange Fund.

Short commodities rocketed

Inverse (i.e. short) commodities, as shown below, had a decent run from July, but prudent investors are not likely to tolerate much exposure to such a volatile asset class.

Looking forwards

It is impossible to speculate about the future for trend followers as decisions can only made based on historic data.

However, since the start of the year we have seen both the NASDAQ and S&P indexes replaced by U.S. mid-cap stocks and U.S. REITs, as the rally widens out beyond mainstream U.S. stocks.

European markets appear to be now setting the pace at domestic level, having lagged the U.S., but the weakness of the Euro currency has kept these markets from entering the frame. It will be interesting to see if these positive trends that are emerging are sustained by quantitative easing from the European Central Bank and whether the currency can hold up to warrant inclusion for a sterling-based investor.

Stacey Ash is an investment manager and head of sales at iFunds